By DR. ANDREAS STOFFER – Country Director Vietnam Friedrich-Naumann-Foundation Vietnam
Given the promising figures of the last months, many observers expect Vietnam’s economy to continue its growth path. The Vietnamese government’s efforts to revive the markets and secure a macroeconomic balance will play a major role in this. However, in the first eight months of 2023, Vietnam faced a variety of economic challenges.
Spillover effects from China?
For many years, until the COVID-19 crisis, the Vietnamese property market was a safe bet, especially for both private investors and institutional investors. The Vietnamese property market had a reputation for generating high returns in a short time. This was certainly due to the traditional preference of the Vietnamese for real estate ownership, but also to the lack of safe alternatives in other areas as well as rather lax supervisory practices, the structure of the Vietnamese financial industry in general, and the fact that the financial literacy of large parts of the population is too low.
Many investors are now looking anxiously to China— especially since the bankruptcy of the Chinese Evergrande Group. Vietnam appears at first glance to be very similar to its neighbor in terms of socio-economic and political structure.
What is particularly striking about the Vietnamese market is that the issuance of corporate bonds has increased sharply in recent years. During the COVID-19 pandemic, the Vietnamese real estate sector faced challenges in terms of capital flows. To overcome liquidity problems, developers turned to the bond market, which attracted small investors due to limited investment opportunities.
The real estate and the bond market are closely linked in Vietnam (almost 25% of real estate bonds had defaulted by May 2023). A significant part of the increase in bond default rates can be attributed to real estate developers, as this sector has driven the corporate bond market and attracted numerous investors. To overcome liquidity problems, developers turned to the bond market with professional bonds that could be issued easily and quickly. The regulator tried to protect retail investors from this type of risky investment by restricting access to professional bonds, which do not require any regulation or transparency, as early as 2020 (Decree No. 153/2020/ND-CP). However, the strict regulations led to a sharp decline in bond issuance, which affected the liquidity of developers and led to a temporary halt in ongoing real estate projects.
Advice for investors in the current market situation
Every investment also carries a risk; however, what is crucial is how one identifies and ultimately deals with these risks. Companies can do their part by improving their own risk management, opening up to independent ratings, and working with reputable foreign capital providers.
In my view, Vietnam will continue to be an interesting real estate location. However, just like elsewhere in the world, the decisive factors will be the choice of a suitable location, the quality of construction, the financial soundness of the developer, and, ultimately, the greater inclusion of rental income.
